Gold Price Lower on U.S. Dollar Strength

GOLD PRICE NEWS – Weakness in the gold price continued Wednesday morning as the yellow metal fell $16.83 to $1,615.00 per ounce.  Strength in the U.S. dollar, which rose 0.22 to 80.45 as measured by the U.S. Dollar Index (DXY), pressured the price of gold.  The euro slid to 1.297 against the dollar, its lowest level since January.

Steve Scacalossil, TD Securities Director of Global Precious Metals, highlighted the fact that gold and silver declined following the release of yesterday’s policy statement from the Federal Open Market Committee (FOMC).  He noted that “While the statement delivered no changes to the Fed’s accommodative policy stance, the market reaction suggests traders were looking for a stronger move toward quantitative easing.”

Gold prices declined $34.97, or 2.1%, to $1,631.83 per ounce on Tuesday after the Federal Reserve decided not to implement any further accommodative monetary policies or make reference to the fact that is was contemplating additional easing.  The price of gold traded modestly lower prior to the Fed meeting, but subsequently turned sharply lower amid broad-based liquidation in risk assets.  Coupled with Monday’s 2.6% retreat, the spot gold price has now fallen 4.7% this week – its worst two-day stretch since September 23 and 26, 2011.

Silver fared slightly better than the gold price yesterday, but still managed to slide $0.57, or 1.8%, to $30.80 per ounce.  In doing so, silver reached its lowest level since October 20.  Furthermore, gold’s sister precious metal returned to negative territory on a year-to-date basis, by 0.5%.  For comparison purposes, the gold price remains higher by 14.8% in 2011.

Gold and silver stocks beared the brunt of selling pressure in the precious metals space on Tuesday.  The Philadelphia Gold & Silver Index – comprised of the sector’s largest companies – dropped 3.1% to 187.82.  With its decline, the XAU extended its year-to-date loss to 17.1%.  Among gold miners, yesterday’s worst performers were Kinross Gold (KGC) and Yamana Gold (AUY) – which sunk 4.7% and 4.1%, respectively.  Gold mining stocks traded slightly lower early Wednesday morning.

Continued strength in the U.S. dollar has provided a headwind for the gold price in recent weeks.  The euro tumbled 2.6% to an 11-month low of 1.3034 against the dollar as sovereign debt concerns continued to plague the euro zone currency.

Chairman Bernanke and the FOMC largely met market expectations on Tuesday by announcing no changes to the current batch of monetary policies.  Although the Fed reiterated the need for extremely low interest rates and Operation Twist, it decided not to implement a third round of quantitative easing (QE3).

In a repeat of the November FOMC meeting, Chicago Fed President Charles Evans cast the lone dissenting vote.  Evans, one of the foremost doves at the Fed, once again “supported additional policy accommodation.”

However, BTIG’s Chief Global Strategist – Dan Greenhaus – highlighted a critical difference between the November and December Fed statements.  In a note to clients, Greenhaus wrote that “Indeed, language in the second paragraph is changed in a more specific manner; last month the Fed said that ‘there are significant downside risks to the economic outlook, including strains in global financial markets.’  This statement says ‘Strains in global financial markets continue to pose significant downside risks to the economic outlook.’  The difference may be dismissed by some as negligible but it is no less important; it is consistent with a Fed more optimistic about the U.S. but still concerned about the European crisis.”

The modest improvement in the Fed’s economic outlook could reduce the potential for QE3 and likely contributed to the gold price sell-off on Tuesday.  In the months ahead, U.S. economic data will therefore take on an even more significant role due to its impact on both gold prices and the policy response of the Federal Reserve.